Chewy, Inc.

Hello, everyone, and welcome to the TUI Second Quarter 2025 Earnings Call. My name is Emily, and I'll be coordinating your call today. After the presentation, you will have the opportunity to ask any questions, which you can do so by pressing Start, followed by the number 1 on your telephone keypad. I would now like to hand over to Natalie Nowak, Director of Investor Relations.

Natalie, please go ahead. Thank you for joining us on the call today to discuss our second quarter results for fiscal year 2025. Joining me today are Chewy's CEO, Sumit Singh, and Will Billings, our Chief Accounting Officer and Interim Principal Financial Officer. Will is a respected leader with extensive finance and accounting experience, and we appreciate his dedication to Chewy as he takes on this expanded role while we continue to search for a permanent CFO. Our earnings release, which was filed with the SEC earlier today, has been posted to the investor relations section of our website. In addition to the earnings release, a presentation summarizing our results is also available on our website at investor.chui.com. On our call today, we will be making forward-looking statements, including statements concerning CHUI's financial results and performance, industry trends, strategic initiatives, share repurchase program, and the environment in which we operate. Such statements are considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks, uncertainties, and other factors that could cause actual results to differ materially from our forward-looking statements. We encourage you to review our FCC filings, including the section titled Risk Factors, in our most recent form 10-K for a discussion of these risks. Reported results should not be considered an indication of future performance. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We assume no obligation to update any forward-looking statements except as required by law. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP items to the most directly comparable GAAP financial measures are provided on our investor relations website and in our earnings release. These non-GAAP measures are not intended as a substitute for GAAP results. Additionally, unless otherwise stated, all comparisons discussed on today's call will be against the comparable period of fiscal year 2024. Finally, this call in its entirety is being webcast on our investor relations website. A replay of the audio webcast will also be available on our investor relations website shortly. And with that, I'd like to turn the call over to Sumit.

Thanks, Natalie, and good morning, everyone. Q2 net sales grew by nearly 9% year-over-year to $3.1 billion, exceeding the high end of our guidance range. Moreover, against an industry backdrop of low to mid-single-digit growth, Our Q2 performance demonstrates a clear share gain outcome. Strength of our Autoship program in categories such as consumables and health anchored Q2 net sales performance. Second quarter Autoship customer sales of $2.58 billion represented 83% of our Q2 net sales, reaching a new record high for the company. Growth in Autoship customer sales once again outpaced overall top line growth, increasing by nearly 15% in Q2. We are also pleased to see the continued strength within our hard goods business, which grew over 15% in the second quarter, primarily on the back of structural volume growth. And finally, a rapidly strengthening Chewy Plus program exceeded our expectations in the second quarter. I will comment more on our progress with this program in a moment moving to customers, we ended the second quarter with 20.9 million active customers reflecting 4.5% year over year growth. Importantly, the strength and quality of our new customers continue to improve. New customer Nespac for the Q2 2025 cohort strengthened quarter-over-quarter and is trending mid-single digits higher on a year-over-year basis relative to the comparable Q2 2024 cohort. For Total Chewy, we continued to expand customer share of wallet in the quarter with Nespac reaching $591, representing 4.6% year-over-year growth. Moving down the P&L to profitability, gross margin reached 30.4% in the quarter, expanding on both a sequential and year-over-year basis by nearly 80 and 90 basis points, respectively. For Q2, main drivers of gross margin were both our fast-growing sponsored ads business and favorable mix into premium categories. Pricing and promotion remained rational and did not have a material impact on gross margins in the second quarter. Continuing on the topic of profitability, we generated $183.3 million of adjusted EBITDA in the quarter, representing a 5.9% margin and a year-over-year increase of over 80 basis points. We also generated nearly $106 million of free cash flow in the quarter. Our robust profitability and compelling free cash flow generation enabled us to not only invest in our strategic growth initiatives, but also return meaningful capital to shareholders as reflected by the nearly $125 million we deployed towards share repurchases in the quarter. Now, I would like to provide an update on some of CHUI's strategic initiatives. The Chewy VetCare or CVC network continues to outperform relative to expectations in terms of demand generation and driving broader ecosystem benefits. We are consistently observing that CVC customers drive both the highest and fastest nest pack curves for Chewy. Additionally, we remain on track to open 8 to 10 new practices in fiscal year 2025 to reach a total count approaching 20 by year end, and we look forward to keeping you updated on our progress. Shifting gears, let's talk about CHUI Plus, our paid membership program. As a reminder, today CHUI Plus members receive the following benefits. Free shipping on all orders. 5% rewards to redeem on future orders, limited time seasonally relevant member exclusive offers, and a 30-day free trial period. At the end of the free trial period, members pay an introductory price of $49 per year and convert to paid members. As I shared in my remarks earlier, the CHUI Plus membership program is rapidly strengthening, indicating a strong product market fit. In the month of July, roughly 3% of Chewy's total monthly sales were to Chewy Plus members. Importantly, we are observing strong incrementality in spend, net pack, and positive contribution profit per customer across Chewy Plus customers compared to non-members. Furthermore, other key leading indicators of success are promising. These customers are buying at a higher frequency and attaching a higher number of products to their orders. Additionally, we are observing incremental auto-ship adoption and greater mobile app usage from Chewy Plus members relative to non-members. All of this is leading to both higher as well as accelerated net back curves for two plus customers compared to non members, which in turn is contributing positively to choose net sales flywheel. As we exit this year we expect approximately mid single digit percentage of our net sales to go through the tree plus Program. Further, we expect the program to generate positive gross profit dollars in fiscal 2025, though at a gross margin rate below CHUI overall, reflecting both the ramp that we anticipate in the second half of this year and the mix of paid versus free trial members. As we scale, we will remain disciplined in evaluating the program structure, including pricing and member benefits. Moving on, now let's talk about Chewy private brands. I am excited to share that in August, we launched Get Real, our new Chewy exclusive private brand of healthy, fresh dog food. The fresh and frozen segment represents a fast-growing TAM fueled by trends of humanization and premiumization in pet. Consumers believe that their pets deserve fresh and nutritious food, leading to longevity and an overall higher quality of life for their beloved pets. Get Real, a new line of minimally processed fresh dog food available only at Chewy, comes in three different pup-approved recipes, including chicken and Brussels sprouts, beef and sweet potato, and turkey and cranberry, All available as both full meals and meal toppers made with 10 or fewer ingredients plus vitamins and minerals. Additionally, this premium product is delivered to your doorstep in pre portioned ready to serve meals just talk and serve. Although the product has only been in market a few weeks customer reception is strong. customers are pleased with the palatability, quality, and overall experience, which includes shopping, delivery, and consumption. I am also pleased to share that we have already built up sufficient capacity through 2028 to support our growth in the fresh frozen segment broadly. both for Get Real and for our national brand partners, while remaining very much at the lower end of our previously set CapEx guidance range of between 1.5% to 2% of net sales. With the capital investment behind us, we are now in process of scaling to a national footprint by leveraging our existing fulfillment center topology. By the end of 2025, we expect to be ready to deliver a majority of our fresh food offering to customers within a one-day transit time. Furthermore, GetReal is exclusively an auto-ship subscription business that results in high gross profit per unit at scale, supporting both broad leverage across our operational infrastructure and our aspiration of becoming a leading profitable player in the fresh and frozen segment. While still early, we are pleased with the launch of this product and the positive response from our customers. Beyond Get Real, we are working on bringing other Chewy branded product innovation to market in the second half of 2025, and I look forward to keeping you updated on our progress. Before I turn the call over to Will, I would like to leave you with a few closing thoughts. The first half of 2025 has been an exciting and productive period for Chewy. reflecting the strength of our differentiated value proposition and the momentum across our business. Looking ahead, we expect the second half of the year to be even more dynamic given the evolving macro. As many retailers prepare to pass tariff-related costs on to customers, we believe Huey is well positioned to mitigate these pressures. Our higher mix of consumables and health and proactive investments in on shoring incremental discretionary inventory provide meaningful safeguards. These actions will help deliver a superior customer experience by selectively evaluating pricing, while protecting product margins. Additionally, instead of absorbing these pressures, we plan to lean into growth by investing behind the expansion of programs like Chewy Plus and our private brands. Customers are embracing these initiatives for their compelling value proposition, and we are equally encouraged by their strong return on investment. Overall, we see the second half of 2025 as an opportunity to further accelerate market share gains in the U.S. and position Chewy for even greater long-term success. With that, I will turn the call over to Will.